Introduction to the Estate Tax and Common Questions

By | March 3, 2015

The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death (Refer to Form 706 (PDF)). The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.


What do most people think is it fair or unfair estate tax?

A significant point that’s not mentioned here is the fact that sometimes when someone dies his wealth is not in liquid assets, rather he has a business that’s worth a large amount of money. Now if the inheritors have to pay estate taxes on it, and they don’t have the cash to come up with, they are gonna have to sell the business or break it up in order to pay the taxes. I don’t see what’s very fair about that, having to destroy the business their father worked his whole life to build, or giveit to someone else.
On the nobility point, it does not work out like that. Our capitalistic system ensures that only someone worth his money ends up keeping it, if not they end up loosing their money fairly quickly, and history could attest to that.


Estate Tax Example

Is the $5 million exemption per deceased? Or per recipient? Say instead of having just one daughter, a person with a $10 million dollar estate has ten children among whom he is dividing the money equally in his will. Will each of his ten children get $1 million untaxed? Or will each of them receive $500,000 untaxed plus whatever the other half portion is left after taxation? And how is the estate tax applied if the deceased wants to spread the inheritance among his siblings and other friendsand family? Is there a separate rule about leaving money for the surviving spouse, or even a parent of the deceased? What about the payouts from life insurance? Does that factor into part of the estate? Or is that automatically exempt? (For example, we don’t claim car insurance payouts as “income”.) Also, how would the joint $10 million exemption be applied? For a couple to pass away at the same time, or even in the same year would be a rare, and unfortunate, occurance. Is that the only scenario where the $10 million exemption comes into play?


How to Not Pay Estate Tax

Per estate, which is the same as saying per deceased. It is not the person that receives but the person who gives that is taxed. In estate tax, it is usually the deceased person’s representative filing and paying the estate tax before the remaining money is distributed to beneficiaries. The first 5 million is exempt from estate tax. The other 2 million is taxed at 35%. (It is not really as straight forward as this but to keep it simple…) But if a COUPLE were worth 7 million, then they have a combined exemption of 10 million so it is underthis condition it would all be exempted.


Wealth Transfer and Estate Tax

Couldn’t you transfer all of your wealth to your child before you die and not pay an estate tax?

You can do some of that, but there are limits on the amount of gifts you can make during your lifetime and within a given year, without owing taxes on those gifts. But gift maximization is a common strategy in reducing estate taxes, for those people who can afford to gift while alive.



Wealth Transfer Taxes and Parents

If both parents died at the same time then the child/children would be entitled to an exemption of 10m? If they didnt die at the same time then the child is only entitled to 5m or is it about how the ownership of the funds/property is set up (in either one parent’s name or both parent’s name- regardless if only one dies) that determines if their offspring/the persons they left money for are entitled to 5 or 10m exemption?

Now this rule has changed, as of 2011 the surviving spouse may take the unused credit of the first spouse. Ex. I die and leave everything to my wife (no tax due to unlimited marital deduction) my wife has her $5MM plus my $5MM exemption so she can leave $10MM estate tax free. Referred to in the business as “portability”, meaning the unused exemption of the first spouse is portable over to the surviving spouse.


Estate Tax Amounts and Gifts

Does the $5 million (for single) or $10 million (for couples) include gifts that were given to individuals over the givers’ lifetime? Basically does the estate include gifts that were given before the person died?

Basically yes. A single $5MM is available for life and death transfers combined. There are a few other exemptions notably no gift tax on Tuition and medical payments made directly to the service provider, and a $14,000 annual tax free gift amount to cover incidental gifts like birthday presents.